Google profit up 17%, but short of estimates

Search giant saw sales, costs rise, added nearly 2,000 employees

By

JohnLetzing

SAN FRANCISCO (MarketWatch) — Google Inc. reported a 17% gain in quarterly profit compared with the period a year ago Thursday, even as operating expenses rose, thanks to improving demand for the company’s online advertising.

Mountain View, Calif.-based Google
GOOG, -3.16%
said its first-quarter net income rose to $2.3 billion, or $7.04 a share, from $1.96 billion, or $6.06 a share, in the same period a year earlier. Net revenue for the period ended March 31 rose to $6.5 billion, Google said. Excluding one-time items, earnings for the period were $8.08 a share.

Analysts polled by FactSet Research had expected first-quarter earnings excluding items of $8.11 a share and $6.3 billion in net revenue.

Operating expenses rose to $2.84 billion in the quarter, from $1.84 billion in the period a year earlier. Google Chief Financial Officer Patrick Pichette said during a conference call with analysts that the increase was “primarily” related to the addition of nearly 2,000 new employees during the quarter.

“The big picture is that revenue growth was off-the-charts good,” said James Tierney, chief investment officer at W.P. Stewart, which holds Google shares.

Tierney acknowledged that what many investors might not like, “on a short-term basis,” is that “the company is spending meaningfully,” though that spending is “aimed at keeping revenue growth strong.”

Shares of Google fell more than 5% at $546.88 in after-hours trading following the earnings announcement.

Google, which controls an estimated more than 65% of the U.S. search market, said that its so-called paid clicks — or the number of times that users clicked on its advertising and generated revenue — rose 18% in the quarter compared with the period a year earlier.

Wall Street analysts had been looking for paid-click growth of roughly 16%.

Google also reported that prices paid by advertisers rose 8% compared with the year-earlier period, roughly in line with analysts’ expectations. The company sells its advertising on an auction basis.

Thursday’s earnings report is the first for Chief Executive Larry Page, whose tenure began earlier this month.

Page replaced outgoing chief Eric Schmidt, who has shifted to the role of executive chairman. Page and Sergey Brin co-founded Google in 1998, while Schmidt had served as chief executive since August 2001.

Page made a brief appearance during the call with analysts on Thursday, and said that the quarterly results show “the strength of our business and the continuing growth, really, in the technology industry.”

Google, which has declared that this year will see an internal record for hiring, said Thursday that it added nearly 2,000 new employees during the first quarter, bringing its worldwide total to 26,316.

Google in January that it would add more than 6,000 jobs this year, which would follow some 4,500 new hires in the past year.

The company “is front-loading that,” Tierney said, though he added that, “this is something they should be doing as a company” to expand and address new markets.

Pichette said that Google is intent on investing heavily to bolster its presence in markets such as local listings, operating system software and display advertising.

Pichette noted that the 10% salary increase awarded to all employees earlier this year also weighed on the company’s margins. Google has been widely seen as having to work hard to retain employees who might otherwise seek out jobs with younger firms specializing in social-networking services, such as Facebook Inc.

Google has made a number of efforts to blend new social elements into its services. Page recently notified employees that their bonuses would be tied to the success of integrating social aspects in the company’s products.

Pichette said that social is only “one of the many signals that we use” to improves services. Tying bonuses to the effort was meant “to signal to employees that social is clearly a signal worth investing in,” he added.

Google generally offers few details about businesses such as its YouTube video service, and Android mobile phone operating system software. But the company did say on Thursday that revenue at YouTube is “doubling year over year.”

Google, which has previously disclosed that its mobile phone business is adding over $1 billion in revenue annually, said Thursday that roughly 350,000 phones built on Android are being activated daily.

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